How To Sell Mortgage Notes - 7 Tips On How To Sell Your Mortgage Note
Most people with a mortgage note are not familiar with how to sell that note and how to make sure that the mortgage note buyer is trustworthy. The tips below are basics to help you down the path of successfully selling your mortgage note:
- Work with a licensed real estate broker. If you are working with a note broker in the sale of a mortgage note, make sure that they are a licensed real estate broker in the state where they work (not just a real estate agent). This assures a higher level of competency and professionalism regardless of whether they work in the same state as you do.
- A good down payment is key. While there are many components to mortgage notes, the elements that are most critical when we evaluate the value of a note are an adequate amount of equity (at least 10% down payment for residential and 20% for commercial and land properties), buyer credit (best if credit score above 600), and terms of the note (at least market interest rates, terms of 3 to 20 years, etc.).
- Ensure that the sales price is aligned with the property's true value. The property's value, as determined by an independent appraiser, should be the same as or exceed the sales price.
- Documentation that is clear and thorough. The mortgage note holder should be able to present proof of the down payment and proof of fire insurance on any structures (plus liability insurance on commercial properties).
- Consider selling only part of the mortgage note. If there is not a sufficient amount of equity in the property or if the buyer's credit is weak, the mortgage note holder should consider selling just some of the payments. With this option, the individual receives less money upfront than if selling the whole mortgage note, but also receives payments on the back end, and generally comes out ahead overall.
- Senior liens are better. 1st lien notes are more valuable and will therefore receive better pricing than 2nd or 3rd liens. Junior liens are only marketable if there is at least 30% equity in the property.
- Selling the mortgage note avoids the risk of future problems. Some holders of mortgage notes desire to use owner financing when they sell their properties and enjoy receiving the regular income. However, that is not the case for most. Selling your mortgage note allows you to avoid issues related to collection of payments, annual reporting of interest receipts to the I.R.S., monitoring fire insurance coverage, worrying about property destruction, etc.
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Article written by Alan Noblitt. Published with permission from Alan Noblitt, Seascape Capital Inc., which buys and brokers real estate notes.